The SEC announced this week that it would stay all administrative proceedings involving certain provisions of the Securities Act, the Securities Exchange Act, and the Investment Company Act in the wake of the Tenth Circuit’s decision in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016).

In Bandimere, the Tenth Circuit held that the SEC’s administrative law judges (“ALJs”) were “inferior officers” who are subject to the Appointments Clause of the U.S. Constitution. The appeals court granted the petition for review on constitutional grounds because the ALJ was not constitutionally appointed and his duties involved the exercise of significant authority. The court denied the petition for rehearing en banc on May 3, 2017.

The SEC explained that “[i]n light of the U.S. Court of Appeals for the Tenth Circuit’s recent decision denying rehearing en banc in Bandimere v. SEC, we find it … Read More »

In the first appellate ruling of its kind, the District of Columbia Circuit upheld the SEC’s use of administrative law judges in administrative proceedings as constitutional. The court in Raymond J. Lucia Cos. v. SEC denied Mr. Lucia’s petition for review in which he claimed that the SEC’s use of administrative law judges was unconstitutional.

Lucia argued that administrative law judges are “Officers of the United States” within the meaning of the Appointments Clause in Article II of the Constitution. Lucia urged the court to rule that the SEC’s use of administrative law judges was unconstitutional because those judges have not been appointed by the President, as the Constitution requires. The three-judge panel disagreed and concluded that the SEC’s administrative law judges are inferior officers/employees who are not governed by the clause. In making this determination, the panel considered the significance … Read More »

A real estate developer and an investment firm have asked the Eleventh Circuit Court of Appeals to reconsider a June 2016 panel ruling that reversed a district court’s decision that permitted both litigants to sue the Securities and Exchange Commission on constitutional grounds. The United States District Court for the Northern District of Georgia permitted Gray Financial Group and Charles L. Hill to proceed with a lawsuit against the SEC that challenged the use of administrative enforcement proceedings, and it enjoined the SEC’s pending enforcement action. Gray Financial and Hill, like several other litigants around the country, urged the federal court to declare that the SEC’s use of administrative courts and administrative law judges violates Article II of the Constitution. The district court concluded that it had jurisdiction to consider that question, even before the underlying enforcement proceeding had concluded. … Read More »

A divided Second Circuit panel ruled this week that a private equity magnate cannot challenge the constitutionality of the SEC’s use of administrative proceedings prior to the conclusion of the underlying proceeding against her.

The SEC charged Lynn Tilton in March 2015 with several violations stemming from her collection of management fees from New York–based Patriach firms. In response to the suit, Tilton filed a complaint in federal district court that claimed that the SEC’s administrative proceeding was unconstitutional. She argued that the Commission’s use of administrative law judges violates the Appointments Clause of Article II of the Constitution because the judges are not appointed by the President. The district court dismissed the suit on jurisdictional grounds and ruled that, based on three Supreme Court decisions, the constitutional challenge fell within the exclusive scope of the SEC’s administrative review scheme. The … Read More »

The SEC recently announced a $3.5 million whistleblower award that reversed course from its earlier determination that the whistleblower was not entitled to an award. Press Rel. No. 2016-88 (May 13, 2016). During its preliminary review, the Claims Review Staff determined that the whistleblower had not provided information to the SEC that lead to the success of the Covered Action because the information did not cause the Enforcement Staff to open an investigation, cause the Enforcement Staff to inquire into conduct that was different from what the Enforcement Staff was already investigating, or significantly contribute to the Covered Action. The whistleblower subsequently filed a written response that contested this decision and that provided additional factual information relevant to the investigation.

The SEC reviewed this response and determined that the whistleblower had provided information that “significantly contributed” to the success of the … Read More »

The U.S. Supreme Court granted certiorari this week in a case that is sure to draw significant attention given its likely implications on insider trading liability. Bassam Salman filed the petition after the Ninth Circuit affirmed his insider trading conviction in United States v. Salman, 792 F.3d 1087 (9th Cir. 2015).

Salman was convicted of conspiracy and insider trading arising out of a trading scheme involving members of his extended family. During the time period at issue, Maher Kara, Salman’s future brother-in-law, had access to insider information regarding mergers and acquisitions of and by his firm’s clients that he provided to his brother, Michael Kara. Michael subsequently traded on the information. Michael then shared the information he learned from Maher with Salman. Salman also traded on the information.

Following his conviction, Salman appealed and argued that there was no evidence that he … Read More »

A former executive of Standard & Poor’s (S&P) Rating Services has lost an early constitutional challenge to the SEC’s use of administrative proceedings.

Barbara Duka filed suit in federal court in January, following the SEC’s decision to bring charges against her for violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibits fraudulent conduct in the offer and sale of securities. Duka, formerly a co-manager of the commercial mortgage backed securities group of S&P’s Rating Services initiated the suit to prevent her from being compelled to submit to allegedly unconstitutional proceedings. Duka sought a preliminary injunction, arguing that administrative law judges (ALJs) who preside over administrative proceedings, are unlawfully insulated from oversight by the President in violation of Article II of the Constitution. Last week, District Judge Richard M. Berman of the … Read More »

We previously blogged about the underlying decision in SEC v. Graham, No. 13-10011, 2014 WL 1891418 (S.D. Fla. May 12, 2014), in which the U.S. District Court for the Southern District of Florida dismissed a case involving an allegedly $300 million Ponzi scheme on statute of limitations grounds. In Graham, the court ruled that it lacked subject matter jurisdiction over the SEC’s claims against former real estate executives because the five-year statute of limitations in 28 U.S.C. § 2462 had run. The court … Read More »

In a complaint filed recently in the Southern District of New York, an activist investor and his investment advisor company have gone on the offensive against the SEC. Joseph Stillwell and Stillwell Value LLC filed a complaint seeking injunctive and declaratory relief to prevent an administrative proceeding that the SEC “intends to initiate imminently.”

Stillwell claims that the SEC’s administrative proceedings violate Article II of the Constitution. Article II vests “[t]he executive Power . . . in a President of the United States of America” who must “take Care that the Laws be faithfully executed.” Art. II, § 1, cl. 1; id. § 3. According to Stillwell, SEC Administrative Law Judges (ALJs) are executive branch officers within the meaning of Article II and may not be separated from Presidential supervision by more than one layer of tenure protection. The constitutional violation occurs, … Read More »

In a first of its kind case, the SEC last week charged an investment adviser to a hedge fund with, among other things, retaliating against an employee who reported allegedly illegal trading activity to the agency. The SEC exercised its authority under a Commission rule adopted in 2011 under the Dodd-Frank Act, which permits enforcement actions based on retaliation against whistleblowers.

Under the Exchange Act, employers may not “discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower.” 15 U.S.C. § 78u-6(h)(1)(A). The Act also provides that the Commission “shall pay an award or awards to 1 or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial … Read More »

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